Paying Overwork: What it's Worth

Undesirably long work hours are an increasingly ubiquitous feature of contemporary Anglophone countries despite steadily rising productivity over the last century. For example, the Australian Bureau of Statistics found that 1.7 million Australians were working 50 or more hours per week in 2002—nearly twice as many as two decades earlier.¹

The growing prevalence of these long work hours is a problem because they are psychologically, socially, and environmentally unsustainable. To date, most policies to address this issue have revolved around bans or other limits on the ability of firms to request long hours. Yet recent research findings suggest such policies would be damaging to firms and unappealing to at least a third of workers. As an alternative, firms could be required to pay employees on permanent or ongoing contracts for any overtime they do. 

Psychologists have noted that long work hours are implicated in a range of mental health problems including stress, depression, anxiety, high blood pressure, and insomnia.² Several studies have also pointed out the deleterious impact of overwork on competence, notably in nursing and other care professions.³ Sociologists have implicated long work hours in the emerging care deficit in developed countries, especially in East Asia and Anglophone countries where there is a steady trend of declining time spent with children and the elderly.⁴ They have also noted the rising discourse around work–life balance and the decline of leisure, which has emerged in step with the increase in working hours over the course of the last half century.⁵ Finally, scholars have recently identified the high-carbon intensity of long work-hour lifestyles.⁶ More work hours increase economic throughput, and individuals pressed for time are more dependent on services like take-out and childcare that involve intensive transport networks than more leisured individuals. 

Four policy responses to overwork have received the lion's share of attention in the literature—banning overwork, compulsory flextime (as in France for a period), right to request, and the four-day working week (or six-hour working day).⁷ Banning overwork is fairly self-explanatory—society could legislate to illegalize working for more than 40 hours per week. The four-day working week is also self-explanatory: reducing the standard full time contract to 32 hours a week from 40 would allow people to take a three day weekend. 'Right to request' involves legally empowering workers to ask for flexible work-time arrangements from their employers if they have a care responsibility, such as for children. The rights of employers to refuse are circumscribed by the legislation. Compulsory flextime involves establishing a legal requirement for employees to accrue leave whenever they work more than their contracted base hours.

These policies, at least in the unsophisticated forms outlined above, would be ineffectual if not harmful to aggregate well-being. Individuals already work well beyond legislated hours, so there is no reason to believe further reducing legislated hours would decrease actual hours worked. Right to request, while a sensible policy that would potentially result in better work–life balance, would not reduce total work hours and is likely to lead to more transit between care and work responsibilities. It is thus unlikely to reduce the environmental impact of long work hours. An Australian  study of the relationship between work hours and life and job satisfaction found that 34.9 percent of individuals sampled working 50 or more hours were 'matched' in the sense that they were working the number of hours they wanted.⁸ Overtime bans would thus make a third of the affected workforce less satisfied.

Mandated flextime is more reasonable, but the issue here is that around a third of overworkers fulfill managerial roles in firms, often as owners of those firms, and these roles are typically very difficult to share.⁹ Firms cannot operationally afford to have these people take three months off annually to make up for all of their overtime. This would make firms significantly less functional and therefore less profitable, leading to job losses. Moreover, a forthcoming study found high average job satisfaction among these overworking managers and among overworkers in general, suggesting that they are compensated in some way for this overtime, perhaps through wages, agency, responsibility, or social status.¹⁰ It further found that those who were dissatisfied with their jobs simply changed jobs. There is therefore little reason to believe that a blunt state intervention is necessary. What's needed is a policy to tackle overwork that offers some flexibility to firms and workers and does not compromise efficiency. 

One idea is to institute compulsory overtime pay. In Australia in 2010, 80.1 percent of overworkers were working on a permanent or continuing basis and averaging 62 hours a week.¹¹ Given that the standard full-time contract in Australia is 38 hours, this implies an average of 24 hours of unpaid overtime per week. At present, firms have no reason not to extract these hours from their employees because they are not required to pay anything extra for them beyond the base salary. If contracts were required to specify an overtime rate, then for overtime to be profitable the additional revenue generated by an hour of overtime would have to exceed the overtime rate. Given that productivity declines with fatigue, we could reasonably foresee firms reducing their reliance on overtime under these conditions as they would be paying high rates for ineffective labor.¹² If sharp decreases were desired, penalty rates could apply whereby overtime rates rise rapidly as the length of overtime increases.

 This approach has several appealing features. First, it shouldn't lead to job losses. While it may reduce firm profits, firms will need to hire more workers to offset the declining productivity of employees who are overworked and charging overtime. To complete these hires without curtailing profitability, firms will probably need to reduce the size of base salaries. But studies have found that overworkers would be happy to forego income in order to work less, so this would not reduce total welfare.^9,11,13 Second, requiring overtime pay should not lead to any complications for managers, as they can still work longer and be compensated with higher wages, as they are currently. Third, there should be no cost to flexibility in general, because the policy enshrines simple provisions for extending work hours on a needs basis.

Most importantly, the policy will lead to a more efficient allocation of resources across an economy that is in-society-in-nature. Fundamental microeconomic theory suggests that efficiency requires that inputs like labor be paid their marginal products. It is thus inefficient to have individuals working unpaid. While firms might be more profitable and GDP rising when overtime goes unpaid this is because the costs of this unpaid labor are externalized onto the informal economy, households, and the community, who are off-books. As overwork has increased in prevalence, there has been a noted decline in household hours, care hours, community involvement, and volunteer work.¹⁴ Real efficiency requires optimization across all of these dimensions. 

There are at least two shortcomings of the policy. First, firms often use long work hours as a form of screening to overcome adverse-selection problems.¹⁵ The policy should not have too deleterious an affect here, as spotting top workers should be simple under the policy—they get work done for the least overtime cost. More problematic is that the policy will encourage some workers to shirk during regular hours and rack up overtime. It may be difficult for some businesses to monitor workers to ensure this doesn't happen.

The view that unpaid overtime is good for the economy can only be sustained through a blinkered emphasis on throughput and the interaction between labor and built capital. When we fold the other three important capitals—natural, social, and human—into the calculus, we can immediately see that unpaid overtime is not only economically inefficient but also detrimental to aggregate well-being. Unpaid overtime harms natural capital by increasing the carbon intensity of life, social capital by reducing time for care, leisure and community, and human capital through psychological harm. It increases the output of firms, but this is uneconomic because the firms externalize the costs of overtime labor onto the informal economy, households, and the community. If firms were made to pay for these externalities when calculating their labor demand through a charge for overtime, the cost of labor to firms would more accurately reflect the opportunity cost of using tired workers. Firms would then minimize overtime hours as this labor would be more expensive. More short work hour contracts would become available and full-time workers would have more time to allocate to the informal economy as parents, carers, volunteers etc., thus increasing aggregate well-being.

Mark Fabian is a PhD Candidate in Economics at the Australian National University.

This article was originally published in Solutions vol. 6 No. 1, January-March 2015.

References

1.      Australian social trends 2003. Paid work: longer working hours. The Australian Bureau of Statistics [online] (2014). http://www.abs.gov.au/AUSSTATS/abs@.nsf/46d1bc47ac9d0c7bca256c470025ff87/923EC292ABA44932CA2570EC00006EE7?opendocument.

2.      Iwasaki, K, Takahashi, M & Akinori, N. Health problems due to long working hours in Japan: working hours, workers' compensation (Karoshi) and preventative measures. Industrial Health 44, 537–540 (2006). 

3.      Rogers, A, Hwang, WT, Scott, L, Aiken, L & Dinges, D. The working hours of hospital staff nurses and patient safety. Health Affairs 23(4) (2004).

4.      Nock, SL & Kingston, PW. Time with children: the impact of couples' work-time commitments. Social Forces 67, 59–85 (1988).

5.      Hochschild, AR. The Time Bind: When Work Becomes Home and Home Becomes Work (Metropolitan Books, New York, 1997).

6.      Knight, K, Rosa, E & Schor, J. Could working less reduce pressures on the environment? A cross-national panel analysis of OECD countries. Global Environmental Change 23, 691–700 (2013).

7.      Coote, A & Franklin, J (eds). Time On Our Side: Why We Need a Shorter Working Week (New Economics Foundation, London, 2013).

8.      Golden, L. Flexible daily work schedules in US jobs: formal introductions needed? Industrial Relations 48(1) (2009).  

9.      Wooden, M, Warren, D & Drago, R. Working time mismatch and subjective well-being. British Journal of International Relations 47(1) (2009).

10.  Greef, A & Nel, P. Employment transformation and enhancement in South Africa: establishing a job-sharing model to promote employment equity. South African Journal of Labour Relations 27(2) (2003).

11.  Fabian, M. (forthcoming). Draft available by request: mark.fabian@anu.edu.au.

12.  Shepard, E, Clifton, T & Kruse, D. Flexible work hours and productivity: some evidence from the pharmaceutical industry. Industrial Relations 35(1) (2008).

13.  Drago, R, Wooden, M & Black, D. Long work hours: volunteers and conscripts. British Journal of International Relations 47(3)

14.  Leigh, A. Disconnected (UNSW Press, Sydney, 2011).

15.  Putnam, R. Bowling Alone: The Collapse and Revival of American Community (Simon and Schuster, New York, 2000).

Landers, R, Rebitzer, J & Taylor, L. Rat race redux: adverse selection in the determination of work hours in law firms. The American Economic Review 86(3) (1996).